Understanding your instalment sale agreement and tax invoice (Part 2)
Have you decided to finance a car by means of an instalment sale agreement? Do you have an understanding of the terminology used in this agreement and the accompanying tax invoice?
In part two of this feature, Sbu Dhlamini, Head of Compliance at Absa Vehicle and Asset Finance, provides some more information on this agreement and the accompanying tax invoice.
Understand the car finance terminology used in an instalment sale agreement and tax invoice
What does an instalment amount relate to?
The instalment amount is the amount that you agree to pay towards the repayment of your principal debt, including interest and your service fee. This amount is clearly indicated on your instalment sale agreement and is calculated by dividing the outstanding balance on your account (including interest, charges, fees and insurance) by the remaining term of your agreement (number of months).
You may choose to pay your instalment amount monthly, quarterly, bi-annually (twice a year) or annually (once a year) at the variable or fixed rate on the instalment sale agreement.
What is the earliest that I can settle my instalment sale agreement and what is an early termination charge?
You can settle your instalment sale agreement at any time during the term of the agreement by requesting a settlement figure from your credit provider.
Section 125 of the NCA permits your credit provider to add an early termination charge to your settlement figure if your principal debt is R250 000 or more. This charge is equal to the amount of interest payable on your account for the period from the date on which you request the settlement figure to the date on which you settle the account, but may not be more than three months worth of interest.
What is a balloon payment?
You can choose to apply a residual value or balloon payment as your last instalment to your instalment sale agreement.
Having a residual value or balloon payment helps to reduce your instalment amount over the term of your agreement, but it’s important to budget and make sure that you’re able to repay this amount in a single payment at the end of the agreement term.
Is there interest charged on the balloon amount and will the final amount include interest charges?
Interest is charged on the outstanding balance on your principal debt, which includes the balloon amount. The interest payable is included in your instalment amount payable over the term of your agreement, so your final balloon payment is a capital amount only, with no added interest.
What if my car is worth less than the balloon payment owing at the end of term?
Your car will depreciate in value over the term of your agreement and it is expected to depreciate at a rate of about 20% per annum, although some car brands do depreciate at a lower rate.
How can I reduce the balloon payment during the term of my instalment sale agreement?
Any lump sum payment that you make in addition to your instalment amount will be applied to your outstanding balance, first against due or unpaid interest, then against due or unpaid fees and charges and finally against outstanding capital, which includes the balloon amount.
Should you be interested in finding out more or applying for vehicle finance from Absa, please visit www.absa.co.za/vehiclefinance
Click here for part 1 of understanding your instalment sale agreement and tax invoice
Disclaimer: The advice contained on this blog is for general purposes only and does not take into account individual circumstances, objectives or financial needs. Accordingly, readers are advised to seek appropriate advice from licensed professionals prior to making any investment, or taking up a financial product or service.